A market can be viewed as a set of economic considerations, relationships, participants and constraints that come together to form and define a market structure. Economic considerations might include value (often the price when dealing with goods and services), supply and demand, competition, etc. Relationships might include agreements or arrangements amongst businesses, companies, trading partners, OEMs, distributors, resellers, etc. Participants might include buyers, sellers, brokers, etc. Constraints might include regulatory frameworks, trading conditions, barriers to entry, etc.
Markets form for many different reasons and the advent of the Internet has provided the basis for the development of existing market structures and the introduction of new market structures. There are many different types of markets (i.e., market structures) that currently exist. Examples of some of the most common market structures are discussed below.
Fixed Bid Market Structure
A fixed bid market structure is based on a posted-price economic structure. In a fixed bid market structure, the list or transaction price is always the seller's price. Typically, there is no negotiation of the seller's prices, but the seller might offer the buyer volume discounts. One example of a fixed bid market structure is a grocery store. In a grocery store, rival grocery sellers post prices and sell to consumer buyers through face to face communication (or even over network communication such as Web-based grocery sellers www.webvan.com). Hence, the consumer buyers are bound by the seller's prices.
English Auction Market Structure
An English auction is the most common type of ascending-bid auction. In an English auction, the auction begins with the lowest acceptable price (a reserve price) and proceeds with successively higher bids until no buyer will increase their bid. The transaction price is the highest bid price.
Dutch Auction Market Structure
A Dutch auction is the most common type of descending-bid auction. In a Dutch auction, the auction begins at an extremely high price and is progressively lowered until a buyer claims an item. The transaction price is the lowest bid price.
Sealed Bid Auction Market Structure
One type of sealed bid auction is a first-price sealed bid auction. In a first-price sealed bid auction, buyers submit sealed bids for items that are offered by a seller. Each bidder submits a bid with no knowledge of the other bids. The transaction price is the winning buyer's bid. In a first-price auction with more than one unit of the product up for sale, the sealed bids are sorted from highest to lowest and winning bidders often pay different prices for each unit of the product. Another type of sealed bid auction is a Vickrey sealed bid auction. In a Vickrey sealed bid auction, the bids are sealed but the item is awarded to the highest bidder at a price equal to the second highest bid. If multiple units are for sale, all winning bidders pay for the items at the same price, namely the highest closing price (or second highest bid).
Reverse Auction Market Structure
A reverse auction market structure is the most common type of seller-driven auction. In a reverse auction, sellers submit successively descending offers until no one is willing to reduce their price any further. The transaction is settled at the lowest seller's offer price.
Call Auction Market Structure
In a call auction market structure, there is one seller and multiple buyers competing to purchase a fixed supply of goods. The call auction is typically used for selling treasury bonds. The bids are accumulated during the call period and are sorted from highest to lowest at the end of the call period. The bonds are then awarded to bidders starting at the highest bid price and moving down until all the bids are exhausted.
Double Continuous Exchange Market Structure
The double continuous exchange market structure has been the principal trading format in U.S. financial institutions for over a hundred years. In this market structure, buyers submit bids and sellers submit offers that are ranked highest to lowest to generate buy and sell queues. From the queues, the maximum quantity traded can be determined by matching sellers' offers (starting with the lowest offer and moving up) with buyers' bids (starting with the highest price and moving down). Matches occur when the buy queue and the sell queue overlap.
Call Market Exchange Market Structure
Bids from buyers (i.e., buy bids) and offers from sellers (i.e., sell offers) are accumulated during a predefined call period and optimally matched at the end of the call period. A call market exchange is used in a variety of markets in which buy and sell orders are collected over a period of time for batch rather than continuous execution. The New York, Tokyo, Paris, and Frankfurt stock exchanges use call market exchanges everyday to establish the opening price for each stock. After the opening, subsequent trading is performed using a double continuous exchange market structure.
Other Market Structures
There are many other market structures and the examples discussed above are designed to be an overview of some of the more common market structures currently in existence. In addition to different types of market structures, there are also numerous facets complementary and/or intrinsic to market structures which enable auctions, exchanges and other market structures to operate in a more optimistic manner by meeting the requirements of specific market structures. Examples of such facets include proxy bidding, contingency bidding, bundling/unbundling bidding, and budget management bidding.
Proxy bidding is an auction monitoring tool that enables one to participate in an auction without being present. For a given auction, the bidder may specify a maximum (or minimum depending on the format) bid (and possibly a bid increment) for a product or service. As the auction progresses, the proxy bids on the bidder's behalf, and each time the bidder is outbid, the proxy submits a new bid (at the specified bid increment). This process continues until the bidder wins or the specified maximum/minimum bid amount is met.
Contingency bidding is the ability to control a buying or selling decision based on another buying or selling event or rule. Contingency bids can apply across multiple exchanges or auctions, and any set of decisions that occur during the trading process. An example of a contingency bid would be: If the market participant buys 100 shares of IBM stock at $125 or better then sell 100 shares of this market participant's GE stock at market price.
Bundling/Unbundling bidding is the ability to break apart or combine offerings or purchases usually to achieve greater efficiencies. A basic form of the functionality is outlined in the Weights and Variances for product metrics. A user should specify whether they will accept partial quantities and what is the minimum quantity they will accept and any multiples thereof. For example, a market participant may place an order to buy 500 shares of IBM stock at $116, allow partial orders of 200 shares and a minimum lot size of 100. Therefore, depending on market conditions, the buyer may purchase 200, 300, 400 or 500 shares of IBM. Another example of bundling bidding is basket trades or trades where a portfolio of different holdings are traded as a single package.
Budget management bidding is a trading tool that gives the user the ability to specify a maximum spending limit, but allows for the system to solve for the optimum decision. For example, assume a traveler had $1,000 to spend on a four day vacation in San Francisco and the traveler needs airfare, hotel accommodations and a rental car. The system would search for hotels, airfare and rental cars and then present vacation packages within the specified budget. An example of a budget management bidding system is www.priceline.com.
Today's market structures are often implemented over communications networks, thereby creating electronic marketplaces. Indeed, the advent of the Internet has provided a standard business communication channel platform for electronic marketplaces; however, current electronic marketplaces (including Internet-based electronic marketplaces) still suffer from limited capabilities and functionality. For example, current electronic marketplaces are limited in their ability to support complex market formation requirements. Websites such as www.ewanted.com and www.iwant.com are examples of buyer-driven systems in which buyers are trying to locate sellers. Websites such as www.ebay.com and www.auctions.yahoo.com are examples of seller-driven systems in which sellers are trying to locate buyers. These and other currently existing Internet-based electronic marketplaces are limited to being able to handle only a limited number of different market structures. For example, the auction sites listed above are only able to handle auction formats (not any other types of market structures such as exchanges) and in addition, are limited in the sense that each auction site can only handle certain types of auctions (e.g., buyer driven or seller driven, ascending or descending, etc.).
One problem with current electronic marketplaces is the fact that such systems are hard-wired and limited in the sense that they are designed to only handle certain market structures or certain facets of market structures but cannot be enhanced or expanded to deal with additional market structures or advanced facets of market structures. Also, current electronic marketplaces lack inter-connectivity. For example, financial markets use an electronic communication network (ECN) model for connectivity between markets. ECN provides the interconnecting of pools of liquidity between markets; however, it is currently difficult to extend the functionality of ECNs and therefore, inter-connectivity of financial markets is limited. While the Internet has provided the platform to enable electronic marketplaces to handle large amounts of liquidity, current systems are not designed to properly utilize the Internet to handle large amounts of liquidity.
It should therefore be appreciated that there is a need for a highly scalable, fault-tolerant electronic marketplace system that can support many different market structures (including the facets associated with more complex market structures), support complex market formation requirements, and allow for easy interconnectivity between markets. The present invention fulfills this need as well as others.